Earnings Call Transcript - SMPL Q3 2025

Operator, Operator

Greetings. Welcome to Simply Good Foods Company's Third Quarter Fiscal Year 2025 Earnings Call. Please note, this conference is being recorded. At this time, I'll turn the conference over to Joshua Levine, Vice President of Investor Relations. Joshua, you may begin.

Joshua Levine, VP of Investor Relations

Thank you, operator. Good morning, and welcome to The Simply Good Foods Company's Third Quarter Fiscal Year 2025 Earnings Call for the 13-week period ended May 31, 2025. Today, Geoff Tanner, President and CEO; and Chris Bealer, CFO, will provide you with an overview of our results, which were provided in our earnings release issued earlier this morning at approximately 7:00 a.m. Eastern Time. Our prepared remarks will then be followed by a Q&A session. A copy of the release and accompanying presentation are available on the Investors section of the company's website at www.thesimplygoodfoodscompany.com. This call is being webcast, and an archive of today's remarks will be made available. During the course of today's call, management will make forward-looking statements which are subject to various risks and uncertainties that may cause actual results to differ materially. The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and the company's SEC filings. Note that on today's call, we will refer to certain non-GAAP financial measures that we believe provide useful information for investors. Due to the company's asset-light, high cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. Please refer to today's press release for a reconciliation of our non-GAAP financial measures to their most comparable measures prepared in accordance with GAAP. The acquisition of Only What You Need Inc., or Owen, was completed on 06/13/2024. Therefore, the company's year-ago performance for the thirteen weeks ended 05/25/2024 does not include results of the Owen business. References during this call to organic or legacy Simply Good Foods refers to Simply Good Foods' business excluding Owen. As we have now lapped the anniversary date of the Owen acquisition, for future calls, the use of organic will refer to year-over-year growth for brands we have owned for more than twelve months. For Q4, that will include the growth of Simply Good Foods excluding Owen for the first few weeks of the quarter, and growth for the entire company for the balance of the quarter. Finally, all retail takeaway data included in our discussion today, unless otherwise noted, is for the thirteen weeks ended 06/01/2025, and reflects a combination of Serconis Neulo plus plus C company estimates for unmeasured channels, as compared to the prior year. I will now turn the call over to Geoff Tanner, President and CEO.

Geoff Tanner, President and CEO

Thank you, Josh. Good morning, everyone, and thank you for joining us. I'll start by reviewing our Q3 performance before turning it over to our new CFO, Chris Bealer, who will discuss our financial results and our updated fiscal year 2025 outlook. We will then be available to take your questions. Momentum continued in Q3 with net sales up 14% year-over-year driven by the acquisition of Owen and approximately 4% organic growth. Consumption was once again up double digits for both Quest and Owen, more than offsetting the anticipated declines for Atkins. As a reminder, Quest and Owen, in aggregate, make up approximately 70% of our net sales today. Growth for the nutritional snacking category remains robust in Q3, up double digits again reflecting the continued mainstreaming of consumer demand for high protein, low sugar, and low carb food and beverage options. Simply Good is at the forefront of this generational shift with an attractive portfolio of three uniquely positioned brands powered by leading sales and marketing capabilities and a talented R&D and supply chain team. Adjusted EBITDA in the quarter grew approximately 3% year-over-year, while our margins remained strong overall, were under pressure during the quarter, as we realized higher levels of inflation, most notably from cocoa and whey. As we discussed on prior calls, we expected inflation to impact our margins as we moved into the second half. In response to these headwinds, we substantially stepped up our productivity and cost management efforts and we've started to realize the contribution from pricing we've taken on select items. We expect to realize the full benefit of productivity and pricing actions over the next twelve to eighteen months. Cash flow generation remains a hallmark of this organization. In the year since we acquired Owen, we have repaid essentially all of the $250 million we borrowed to finance the purchase. And during Q3, we repurchased over $24 million worth of our common stock. At only half a turn of leverage today, our balance sheet gives us optionality going forward. Finally, considering our top and bottom line performance year to date, and trends to begin the fourth quarter, we are tightening our ranges for full year net sales and adjusted EBITDA. I want to commend our teams for their tenacity amidst the dynamic operating environment and delivering a year where we expect to generate approximately 3% organic growth and mid-single-digit total adjusted EBITDA growth. As well as to successfully integrate Owen. Turning to our largest brand, Quest, which represents approximately 60% of our net sales today, the brand delivered another quarter of double-digit retail takeaway in sales growth. Consumption in Q3 grew 11% with household penetration up 120 basis points year-over-year to 18.3%. As Quest approaches $1 billion in net sales, we see a long runway of opportunity. Driven by a framework for growth based on disruptive innovation expanding physical availability, and increasing brand awareness. Our salty snacks platform embodies this strategy. Salty snacks retail takeaway grew 31% this quarter and is on pace to become the largest platform on the Quest business. We continue to successfully launch exciting new flavors and sizes, expand distribution and merchandising in and out of our aisle, as well as in new channels, and we remain focused on building awareness through award-winning marketing. As we work to expand physical availability of chips, we're particularly excited about the support we're getting from retailers who see the growth incrementality of the segment. As an example, at a large mass merchant, Quest recently secured incremental shelf space within our core aisle during their upcoming reset later this year. In addition, at the same customer, Quest gained multiple placements outside our aisle, including on their highly visible health and wellness wall as well as near their heavily trafficked grocery section. Shifting to bars. Consumption grew 3% this quarter, led by growth from our Hero Crispy line and our new Overload bars. Initial distribution and velocities for Overload continue to build in line with that plan. And both consumer and retailer feedback has been positive. The recent launch of our 45 gram Quest milkshake is also progressing nicely. Building ACV and awareness. We're supporting this new platform with activations across the country focused on driving trial. Similar to Overload, ACV is expected to bill through the rest of the calendar year. We're also seeing solid contribution from our Bakeshop platform, which continues to be a highly incremental basket builder for us and retailers. We're excited about the innovation we have coming on this platform in fiscal 2026. To wrap it up on Quest, we're pleased with our Q3 performance and execution. As we enter Q4, we remain committed to driving growth and investing in the brand, positioning Quest to continue its growth trajectory into fiscal 2026. Moving to Atkins. Consumption in the third quarter was down 13% versus prior year, consistent with our forecast. As we discussed last quarter, declines accelerated due to broader distribution losses at a key customer, and from not repeating high volume merchandising events from a year ago. These two drivers accounted for most of the Q3 decline. We're on a journey towards a more focused and sustainable Atkins business. Importantly, the core SKUs of the Atkins portfolio performed above category velocity benchmarks. However, the brand does have a long tail of SKUs many of which turn at below category average levels. Therefore, our approach continues to be to drive towards an optimized assortment for the brand including bringing to market improved innovation, like we've done with the 30 gram Atkins Strong shed. In channels like ecommerce, where we do not have space constraints, we continue to grow nicely with retail takeaway at a key customer up 7% this quarter. Part of the rationale in proactively pruning Atkins shelf space is working with retailers where possible to more effectively utilize the total shelf space allocated to Simply Good Foods. As an example, during upcoming resets, we expect Atkins to see a significant decline in distribution at a large mass retailer. However, we will offset a majority of Atkins space losses with gains for Quest and Owen SKUs that are higher turning and in the case of Quest, more profitable. Our commitment to supporting the brand and confidence in the long-term vitality of the business is underpinned by the strength of the core SKUs. Consumer research and customer conversations continue to reinforce a strong need for a science-based brand and products that help consumers with their weight loss journey, including those using or coming off GLP-1 drugs. We remain committed to our revitalization plan again, in support of building a healthier, more profitable, and more sustainable business. Moving to Owen. Retail takeaway increased 24% in Q3 with strong contribution across channels. Owen's ready-to-drink shakes retail takeaway grew over 20% in the quarter. Distribution increased 18% benefiting from recent gains made during the spring reset. Reflecting on Q3 consumption growth, we fully anticipated that trends would slow relative to the first half as we were lapping some sizable wins from the prior year. As we enter Q4, despite a slightly slower start in June, we expect retail takeaway trends to remain strong, benefiting from incremental distribution wins as well as planned merchandising activity across several retail partners. Stepping back, we continue to see a long runway of growth for the brand. Due to strong velocities and category incrementality that position Owen to continue to expand distribution household penetration and awareness, which remain well below peers, and leveraging Simply's R&D team to still keep portfolio gaps across flavors and sizes, and even new formats. At approximately 10% of our net sales today, with integration work nearly complete, we remain confident in our ability to drive strong double-digit growth. We have the team, capabilities, and insurgent mindset to enable Owen to contribute to Simply's top and bottom line growth for years to come. To summarize, I'm pleased with the momentum in our business. Our fiscal year-to-date performance and our outlook as we work to close the year. Simply Good is uniquely positioned as a leader in the fast-growing nutritional snacking category. With a portfolio and team built to lead the generational shift of demand towards high protein, low sugar, and low carb food and beverage products. We will do this by introducing delicious innovation, expanding physical availability of our products, and building brand awareness. With approximately 70% of our portfolio through Quest and Owen, driving strong top and bottom line growth. As well as an agile culture, flexible supply chain, and a talented team we are confident in our ability to deliver sustainable growth and create meaningful shareholder value. I will now turn the call over to Chris who'll provide you with the details of our financial results and outlook.

Chris Bealer, CFO

Thank you, Geoff. Good morning, everyone. Total Simply Good Foods third quarter net sales of $381 million increased 13.8% versus last year. Driven by the contribution from Owen of $33.6 million or 10% as well as 3.8% organic growth. Organic net sales growth was driven by Quest, which grew 15% in Q3. The brand benefited mainly from strong retail takeaway, as well as a modest improvement in retailer trade inventory to ensure operational continuity during a warehouse transition early in Q4. Net sales for Atkins declined 12.7% in line with consumption. And Owen had another solid quarter with retail takeaway up double digits versus the prior year. Gross profit of $138.5 million increased 3.7% from the year-ago period, driven mainly by the inclusion of Owen. Gross margin was 36.4%, a decline of 350 basis points versus prior year, driven mainly by elevated input costs most notably cocoa and whey, which were only partially mitigated by productivity and pricing. The inclusion of Owen in our results was also a headwind in the quarter. Selling and marketing expenses of $33.8 million were down modestly versus prior year with declines on the legacy business partially offset by the inclusion of Owen to the portfolio. General and administrative expenses were $41.2 million, an increase of $9.7 million versus last year, primarily due to integration expenses and the inclusion of Owen. Excluding stock-based compensation and one-time integration costs, G&A increased $4.8 million to $31.4 million driven mainly by the addition of Owen to the portfolio. As a result, adjusted EBITDA of $73.9 million increased 2.8% from the year-ago period. Net interest expense of $4.2 million was up modestly versus the prior year while the effective tax rate was 25.2%, up slightly versus last year. Net income was $41.1 million down from $41.3 million last year. On a fiscal year-to-date basis, net sales are up 13.2%, supporting gross profit and adjusted EBITDA growth of 9.2% and 10.6% respectively. Margins have compressed mainly as a result of the inclusion of Owen in our results. Third quarter reported EPS was $0.40 per diluted share versus $0.41 in Q3 last year. Adjusted diluted EPS was $0.51 compared to $0.50 in the year-ago period. On a fiscal year-to-date basis, the company generated reported diluted EPS of $1.14, up 4.6% versus the prior year, whereas adjusted diluted EPS of $1.46 increased 9.8% versus the comparable prior year period. I want to commend the team for their hard work and strong execution on delivering our results so far this year and their perseverance amidst a dynamic environment. Note that we calculate adjusted diluted EPS as adjusted EBITDA less interest income, interest expense, and income taxes divided by diluted shares outstanding. Please refer to the press release for an explanation and reconciliation of non-GAAP financial measures. Moving to the balance sheet and cash flow. As of 05/31/2025, the company had cash of $98 million and an outstanding principal balance on its term loan of $250 million, bringing our net debt to trailing twelve-month adjusted EBITDA to approximately 0.5 times. Fiscal year-to-date cash flow from operations was $133 million compared to approximately $167 million last year. The decline was primarily due to higher uses of working capital, principally inventory. Capital expenditures were approximately $3 million. During the quarter, the company repaid $50 million of its term loan debt, bringing fiscal year-to-date repayments to $150 million. In the eleven months since we've acquired Owen, the company has now repaid $240 million of the $250 million borrowed upon purchase. In addition, during the quarter, the company repurchased $24 million to repurchase nearly 700,000 shares. The company has nearly $50 million remaining on its current share repurchase authorization. Moving on to our outlook, as you saw in this morning's press release, we are updating the ranges of our full year net sales and adjusted EBITDA guidance. Specifically, we expect the following: Total company reported net sales are expected to increase 8.5% to 9.5%. With organic net sales growth driven primarily by volume. Embedded within that, we anticipate Owen net sales finish the year at approximately $145 million which is the midpoint of our previously provided range. Total company adjusted EBITDA is expected to increase 4% to 5%, which continues to include an assumption that gross margins will decline 200 basis points on a full-year basis. Please note that our outlook includes the fifty-third week in fiscal year 2024, which represents an approximately two percentage point headwind to full-year growth for net sales and adjusted EBITDA in fiscal year 2025. As it relates to the fourth quarter, I would like to highlight a few items. First, we expect Q4 organic net sales to grow around 3% at the midpoint, which as a reminder will include Owen within the organic net sales growth calculation for most of the quarter. Second, our implied gross margin outlook for Q4 reflects an increase in realized inflation, as well as the impact of tariffs, which are beginning to flow into our P&L. Please note that both of these drivers are expected to continue for some time. As Geoff said earlier, we are stepping up our productivity and other mitigation efforts, but these offsets will take time to be fully realized. And third, our updated full-year adjusted EBITDA growth outlook implies a low double-digit decline at the midpoint in Q4, or a mid-single-digit decline excluding the extra week. Finally, I would note that our outlook assumes current economic conditions and consumer purchasing behavior will remain generally consistent over the balance of the company's fiscal year. For a comprehensive summary of our full-year outlook and details on certain below-the-line items, please see slide 16 in our presentation. That concludes our prepared remarks. Thank you for your interest in our company. We are now available to take your questions.

Operator, Operator

Thank you. At this time, we'll be conducting a question and answer session. If you like to ask a question at this time, please press star 1 from your telephone keypad participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Thank you. Thank you. And the first question today is from the line of Matt Smith with Stifel. Please proceed with your questions.

Matt Smith, Analyst

Hi. Good morning. Morning, Geoff, you called that distribution expectations across the portfolio for the upcoming fall shelf reset, including what sounds like significant losses for Atkins. Can you expand on how much of a distribution headwind you expect for the brand and product segments? And how you expect that to impact sales through the channel? Kind of help bridge the comments between significant distribution loss against consolidating distribution behind the hardest working SKUs.

Geoff Tanner, President and CEO

Yeah. Thanks, Matt. Appreciate the question. So the double-digit declines in Atkins that we're seeing right now, obviously, a headwind to total company growth. I do want to credit the team, though, for proactively addressing it. We had productive conversations with the retailers about the best use of space for the category and for Simply. Those conversations acknowledged that Atkins has a strong core of SKUs, but certainly a long tail of lower velocity SKUs. So in conversations with those retailers, the net result is that we're expecting additional cuts for Atkins, which we do expect to offset with gains from Quest and Owen. While we're early in our planning cycle for 2026, most specifically to your question, we do expect to see continued double-digit declines on the Atkins business in 2026 driven almost entirely by these distribution cuts. Again, it's part of our strategy with Atkins to build a more sustainable, profitable, and efficient business. And if you step back a little bit, the core of the Atkins portfolio represents the majority of sales that turn above category benchmarks. What we're dealing with with Atkins is a space issue. I would point to e-commerce where we do not have space constraints and the business is up high single digits. This underscores the health of the Atkins brand. We're insightful and realistic about the space challenge, and we're having productive conversations with retailers about how to offset those challenges with gains from Quest and Owen.

Chris Bealer, CFO

Yeah, Matt. It's Chris. I'll take that. Our planning process is still early, and we'll give a full guide in October. What I can say about the top line is that we will expect to see similar consumption trends on Quest and Owen as we've seen in recent times. We do expect Atkins trends to get slightly worse than 2025 as Geoff just said. I think we'd still be looking at growth, but like Geoff mentioned, Atkins would definitely be a slight headwind. You know, when you strip out the merchandising cuts and distribution losses on Atkins, brands are essentially performing flat. Even in the large club customer, we've been clear about that and growing slightly. It's just that the space constraints, particularly in that limited SKU environment, led to losing on Atkins. Again, in e-commerce where there are no space constraints, we're growing.

Peter Grom, Analyst

Thanks, operator. Good morning, everyone. I wanted to ask on Owen. A bit of a slowdown in the TRAC data, and I think it was a bit weaker than we had modeled in the quarter. We'd love some perspective on how the brand is performing relative to your expectations. Was this slowdown largely contemplated as you think about the guidance? And then, Chris, I just wanted to make sure I understand your response to Matt's question. You said you would expect growth similar to what we've seen recently. So you maybe put some guardrails in terms of what that might mean for Owen as we think about fiscal twenty-six?

Geoff Tanner, President and CEO

Yeah. I'll take the first question and then hand it off to Chris. We remain very confident in the Owen business and believe it has a very long runway for us. To your question, we fully anticipated the deceleration in the second half. It was always in our plans and reflected in our guidance. The key driver here, as I said before, is we lap significant TDP gains, particularly at a large club and mass customer. Given where the brand is in its maturity curve, though, we're very confident that distribution gains are going to reaccelerate. As we look into Q4, we have a clear line of sight to those gains coming over the summer and into the fall. The Q3 was just us lapping a period; we were observing a sustained period of distribution growth from the previous year, and I would highlight that we're 20 to 30 points below leading rated drink peers. So, there’s significant opportunity to add more breadth on shelf, and customer conversations are very bullish on this brand. We'll be seeing meaningful gains starting in the summer and looking beyond that, I'm excited about additional platform innovation that should keep that distribution engine going.

Chris Bealer, CFO

And then maybe just to clarify, what I was saying is if you look at Quest and Owen, recent consumption trends, we expect those to continue into FY '26. Just to specify a couple of points on Owen: in Q3, we had roughly 24% consumption growth, and we'd expect something similar in FY '26 on a full-year basis. That will continue to mix Quest and Owen larger in the portfolio and Atkins smaller in the portfolio given the numbers that Geoff laid out previously.

Robert Moskow, Analyst

Geoff, I was wondering if you have any color for us on the fight for distribution space in the ready-to-drink protein shake category. I would imagine, more new entrants are coming in, more capacity is being built. How has that influenced your ability to get your new Quest shake on the shelf? And do you foresee any change in the fight for shelf space going forward?

Geoff Tanner, President and CEO

Good morning, Rob. It's not a surprise to me that we're seeing stepped-up levels of competition in the ready-to-drink space. That's a reflection of the strength of our category, which, as I mentioned, has now seen 17 quarters of double-digit growth. In ready-to-drink, which is seeing outsized growth even within nutritional snacking, it's no surprise that there have been some recent entrants. However, we've been able to secure great distribution not just within our aisle but broadly targeting retailers, leveraging new capabilities we've put in place to drive distribution out of our aisle. We've got a 45-gram protein shake that is performing well. While it's a competitive space, I'm cautiously optimistic about what I'm seeing. Though there's a competitive environment, I believe we have a significant opportunity ahead.

Alexia Howard, Analyst

Can I ask a slightly different question surrounding the legislation that's just been passed in Texas requiring warning labels to go on foods containing 44 additives by 2027? I'm curious about how much of your portfolio might be affected and whether you can take steps over the next eighteen months to eliminate a lot of those additives. Is that going to be a major challenge for you, and which specific ingredients might be most challenging?

Geoff Tanner, President and CEO

Hi, Alexia. At a high level, we feel much better insulated than many of our large-cap food peers as it relates to food regulations. That's underpinned by our category and our product profile which includes high protein, low sugar and low carb. We assessed our portfolio in light of regulations. The current impact to our portfolio is very small. There are a few SKUs that will likely need some reformulation, but nothing material that we can't execute. I wouldn't anticipate any significant cost implications from this change. This reflects the strength of our R&D team. The recent acquisition of Owen, clean label plant-based, positions us extremely well against this shift. We're going to continue focusing on this brand as we turn on marketing and expand.

Operator, Operator

Thank you. At this time, we've reached the end of the question and answer session. I'll turn the call over to Geoff Tanner for closing remarks.

Geoff Tanner, President and CEO

I just want to thank everyone for joining the call, and we look forward to seeing you in October.